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Bananas and petrol: further evidence on the forecasting accuracy of the ABS 'headline' and 'underlying' rates of inflation

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  • Liam J. A. Lenten

    (School of Economics and Finance, La Trobe University, Bundoora, Victoria, Australia)

Abstract

In the light of the still topical nature of 'bananas and petrol' being blamed for driving much of the inflationary pressures in Australia in recent times, the 'headline' and 'underlying' rates of inflation are scrutinised in terms of forecasting accuracy. A general structural time-series modelling strategy is applied to estimate models for alternative types of Consumer Price Index (CPI) measures. From this, out-of-sample forecasts are generated from the various models. The underlying forecasts are subsequently adjusted to facilitate comparison. The Ashley, Granger and Schmalensee (1980) test is then performed to determine whether there is a statistically significant difference between the root mean square errors of the models. The results lend weight to the recent findings of Song (2005) that forecasting models using underlying rates are not systematically inferior to those based on the headline rate. In fact, strong evidence is found that underlying measures produce superior forecasts. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Liam J. A. Lenten, 2010. "Bananas and petrol: further evidence on the forecasting accuracy of the ABS 'headline' and 'underlying' rates of inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(6), pages 556-572.
  • Handle: RePEc:jof:jforec:v:29:y:2010:i:6:p:556-572
    DOI: 10.1002/for.1152
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    References listed on IDEAS

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    1. Juan-Luis Vega & Mark A. Wynne, 2003. "A First Assessment of Some Measures of Core Inflation for the Euro Area," German Economic Review, Verein für Socialpolitik, vol. 4, pages 269-306, August.
    2. Ashley, R & Granger, C W J & Schmalensee, R, 1980. "Advertising and Aggregate Consumption: An Analysis of Causality," Econometrica, Econometric Society, vol. 48(5), pages 1149-1167, July.
    3. Ivan Roberts, 2005. "Underlying Inflation: Concepts, Measurement and Performance," RBA Research Discussion Papers rdp2005-05, Reserve Bank of Australia.
    4. Robert Dixon & G.C. Lim, 2004. "Underlying Inflation in Australia: Are the Existing Measures Satisfactory?," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 373-386, December.
    5. Andrea Brischetto & Anthony Richards, 2006. "The Performance of Trimmed Mean Measures of Underlying Inflation," RBA Research Discussion Papers rdp2006-10, Reserve Bank of Australia.
    6. Lei Lei Song, 2005. "Do underlying measures of inflation outperform headline rates? Evidence from Australian data," Applied Economics, Taylor & Francis Journals, vol. 37(3), pages 339-345.
    7. George Kapetanios & Gonzalo Camba-Mendez, 2005. "Forecasting euro area inflation using dynamic factor measures of underlying inflation," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(7), pages 491-503.
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